Avino Silver & Gold Mines On The Verge Of Rapidly Accelerating Cash Flow

Quick Facts
Company:	Avino Silver & Gold Mines
Ticker:	ASM.V
Share no.:	23 M (fully diluted 24.5 M)
Market cap:	48 MCAD @ 2.10 CAD (not FD)
Resources:	23 Moz silver (NI-43 101 compliant: 14.7 Moz Ag + 105 koz Au)
Cash:	4.1 MCAD, no debt, no hedge
Income:	Cash flow from ongoing 11 000 ton bulk sample
Production:	Commercial production to start in the spring of 2011 (1.2-2.0 Moz Ag-equivalents/year)
Website:	www.avino.com

Introductory Description

Avino Silver & Gold Mines (ASM) is a junior silver company with a mine and mill in Durango, Mexico. The company is led by David Wolfin who has over 24 years of mining experience. Avino was founded in the sixties by his father, Louis Wolfin who is seen as a mining legend in Vancouver with over 50 years of experience (www.avino.com/i/misc/LouWolfin.html). Both of them are also directors on the board of Coral Gold, a company exploring for gold in Nevada, having outlined a resource of over 3 Moz Au. Additionally Coral Gold also has a Joint Venture with Barrick Gold on one of their properties.

The Avino Mine

Avino's most important asset is the Avino Mine which lies in Durango, Mexico. This mountainous area has historically been described as the "Mountain of Silver" and was mined as an open pit mine as early as the 16th century. Being an open pit, the higher grade ore at larger depths was never mined and is still there. Avino bought the property in the seventies and during the next 27 years the mine was producing silver, gold, copper and lead. When the price of silver dropped to 4 USD/oz the mine was uneconomical and eventually had to shut down, which happened in 2001. Today, with silver prices well above 25 usd/oz, the potential economics of this mine are brighter than ever. Avino used to mine from a vein called the "Avino vein" which is not included in the NI43-101 they have. Let us explain; Avino has discovered a new vein on the property called San Gonzalo and this is the mineralization that Avino is planning to take into production. The company believes that the original Avino vein still has roughly 3 million tons of mineralization with 100 g/t Ag, 0.5 g/t Au plus some copper which would give 9.6 Moz Ag and 48 000 oz Au plus copper.

The new San Gonzalo vein has 4.8 Moz Ag + 38 000 oz Au that is NI-43 101 compliant. Then there is an extra 9.9 Moz Ag + 67 000 oz Au NI-43 101 compliant in tailings. San Gonzalo has the potential to grow even further and drill results not included in the NI-43 101 report are showing some exceptional grades. A news release from September shows values exceeding 5500 g Ag/t over a short interval. They also have a lot of results showing 1000-3000 g/t Ag with 5-15 g/t Au.

Above: Drill results from San Gonzalo

Mill and Production

Avino has a mill with a total capacity of 1250 tpd. Refurbishment of the mill was made during 2008-2010 as part of the goal to run a modern production facility. Avino has the intention to start with a 250 tpd operation, with the possibility to expand to 1250 tpd. The last couple of months the mill has been fed with bulk material from the original Avino-vein to optimize the silver extraction process.

The NI 43-101 report shows an average grade of 320 g/t Ag for San Gonzalo. But if we look at the drill results, we can see that there is a good chance the grades will be even higher, maybe as high as 500-600 g/t. We will have to wait and see what the ongoing bulk sample shows and what the grades will be from San Gonzalo. Recovery tests of the ore have shown values above 90%.

Above: The Avino Mill

If we use the numbers from the NI 43-101 report, the production will be ~900 000 Ag plus 4500 oz Au per year corresponding to ~1.2 Moz Ag equivalents. If we instead use the grades that the drill results indicate, we will end up with ~1.5-1.8 Moz Ag plus ~5000 oz Au per year corresponding to ~2 Moz Ag equivalents. Put that in perspective with today's market cap of only 48 MCAD and compare that to other producing silver companies and you will see that it is quite cheap. As we will soon show in a calculation, the coming cash flow from San Gonzalo will be significant. Another interesting thing to know when comparing to other juniors is that the infrastructure surrounding the Avino mine is valued at 40 MUSD.

The last time Avino was in production, mining the original Avino vein, cash costs were ~4 usd/oz. Avino calculates that cash costs at San Gonzalo will be 6-8 usd/oz. Other costs are believed to be 1-3 usd/oz so the total production costs will be around 7-11 usd/oz. We will get a more exact number once the bulk sample is processed and evaluated.

Ongoing bulk sampling and the deal with MRI trading

Right now Avino is mining an 11 000 ton bulk sample from San Gonzalo. It's about halt way done and in 1-2 weeks they will have all the ore in stope. Subsequently, it will be transported to the mill for processing. The reason for the bulk sample is to understand the production cost, the grades and to optimize the recovery from the mill. If everything looks good, Avino probably will start commercial production in the spring next year.

Avino has a signed deal with MRI Trading AG (http://mritrading.ch) from Switzerland. MRI will buy both the bulk sample concentrate and the concentrate as a result of ongoing commercial production.

Avino will submit a provisional invoice to MRI, its value being calculated by using data covering weight, moisture, minerals and assays. MRI will pay 90% immediately, but to verify the valuation they will have the option to take another sample on arrival to the port and make a comparison of the two. If there is a discrepancy, Avino will have the possibility to dispute, and instruct an independent assayer to validate the test. In such case, the average prices of the metals one month following the shipment are being used to establish the final price. MRI will then pay the remaining 10%.

Above: San Gonzalo mine

Share Structure and Financing

Avino has a very tight share structure and they have been really reluctant to dilute the share base. There are only 23 M shares out (fully diluted 24.5 M) and they do not need any more financing to bring San Gonzalo into production. Sprott Asset Management recently chose to invest 3 MUSD in Avino and in this industry that is one of the best quality assurances you can get. The largest shareholders in Avino are the Wolfin family and two private investors out of New York. The rest of the float is held by approximately 2000 different shareholders. Avino has 4.1 MCAD in cash.

Visions

Avino is considering to put the original Avino vein into production because they have the mill capacity to do it. However, Avino management is taking a sensible approach and the decision to expand will only be made after San Gonzalo working out well by showing a positive cash flow. With ~10 Moz silver left in the Avino vein, the added production from this could be considerable.

There is a video interview here (www.avino.com/i/misc/DavidMorgan.html) that David Morgan made with David Wolfin. They talk a bit about the capacity of the mill and the potential for larger production.

Other Areas

Avino has other areas in British Colombia and Yukon with some encouraging results (www.avino.com/i/pdf/NR-Apr0510-EagleVein2009Drilling.pdf). But the reason for our interest in Avino is the mine in Mexico. But if you want to read about the other properties you can do so on their website (www.avino.com/s/Projects.asp).

Calculation Exercise

Please observe that these are rough calculations, but they do give a very good indication of the potential in the coming cash flow from San Gonzalo. Calculations using an annual production of 1.2 - 2 Moz Ag equivalents with a total production cost in the range of 7 - 11 USD/oz and a silver price of 25 USD/oz:

For 1.2 Moz Ag:

Costs of 7 USD/oz -> 1.2 Moz x (25-7) = 21.6 MUSD
Costs of 11 USD/oz -> 1.2 Moz x (25-11) = 16.8 MUSD

For 2.0 Moz Ag:

Costs of 7 USD/oz -> 2 Moz x (25-7) = 36 MUSD
Costs of 11 USD/oz -> 2 Moz x (25-11) = 28 MUSD

It's a wide range but we will know more after the ongoing bulk sample has been evaluated. If we take an average of the above figures we land at ~26 MUSD. A growing silver junior should at least have an earning multiple of 4-5 times (probably a lot higher). That makes the current market cap of 48 MCAD look very cheap. Especially as the silver price right now is hovering around 30 dollars and our view is that it's going a lot higher in the coming years (1 CAD = ~1 USD).

Above: The entrance to the San Gonzalo mine

Risks

Naturally there are risks combined with a resource junior company like Avino. These are the main risks I see:

• The silver price
• Delays in production start
• The land risk in Mexico
• And also the fact that it's a junior with all the risks associated being a small mining company

Conclusions

Avino Silver & Gold Mines appears to be on the verge of obtaining rapidly accelerating cash flow from San Gonzalo next year.

The share structure is really tight and the company is very conservative when it comes to dilution of the shares through private placements. Avino has a good resource base and a mill that can be expanded from the initial 250 tpd up to 1250 tpd.

Avino has been in production over a long period of time previously and has the know-how to make San Gonzalo a successful silver mine.

We believe Avino is in an excellent position to profitably take advantage a rising silver price.

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Disclaimer: Scoris does not share your potential profits, and therefore does not share your potential losses. The information in this letter and the blog should be seen as a source of inspiration and a start to a future own DD. The review of companies is not an investment advice. Scoris does their best to make sure that all info made available here is correct, despite this inadvertent errors may sneak their way in. Always double-check figures and info yourself before basing any decisions on them.